US Government Shutdown Now Longest Ever: Will it Affect Stock Market?

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U.S. President Donald Trump has been vocal about his intent to fund his desired border wall through Congress, extending the partial government shutdown into its 22nd day to make it the longest in history. What kind of impact, if any, could it have on the stock market in the short-term?

No Impact on the Stock Market

On January 12, WSJ reported that hundreds of thousands of federal workers in the U.S. government missed their first paycheck. Some prison guards have started to drive Uber to cover day-to-day bills, and many took the streets to protest against the shutdown.

Now on its 22nd day, President Trump seems to be willing to extend the shutdown for as long as needed to fund the border wall without declaring a national emergency.

Technically, President Trump could reallocate the funds from military construction to finance the border wall, and several Republican senators including Lindsey Graham encouraged President Trump to declare a national emergency to build the wall.

The US partial government shutdown is now the longest-ever.

Others have suggested that the call for a national emergency could enrage many members in both the Republican and Democratic party and could establish a precedent for future Democratic presidents.

With President Trump outspoken on his plans to work with the Congress rather than to bypass it by calling it a national emergency, the partial shutdown of the U.S. government is expected to extend throughout January.

Currently, the performance of the U.S. stock market is mainly based on three factors that include the Federal Reserve interest rate, earnings reports of major U.S. conglomerates, and the trade war between the U.S. and China.

While the missing paychecks of hundreds of thousands of federal employees could certainly have an impact on a big portion of households in the U.S., it is insufficient to have any meaningful impact on the performance of the stock market.

Events like a government shutdown are just part of the growing noise coming out of Washington that investors should ignore.

In the short-term, depending on the earnings revision breadth or the revised earnings of companies, the stock market could recover or experience another phase of volatility.

Analysts remain cautious in giving an all-clear sign to investors because there are many variables that could shake up the markets in the weeks to come.

Can Stock Market Sustain Recovery?

The Dow Jones has managed to recover in 2019 despite the government shutdown. Will the rally continue?

Often, extreme pessimism and negativity in the markets is considered a positive sign of a bottom and Robeco portfolio manager Jeroen Blokland said that he expects stocks to rebound in the latter half of 2019.

Some kind of turbulence, or phases of elevated volatility, will stay with us because every time the economy hits a soft spot, there will be this chatter about a potential recession coming. I don’t think we’ll see the stability we’ve seen in 2017 and the first part of 2018, but I do think it will become less volatile than December.

The partial shutdown of the U.S. government is not a factor that will contribute to the performance of the stock market at the beginning of 2019. But, investors still have to observe the performance of major U.S. companies and revisit their earnings reports.